Andrew Lilco at the Telegraph lays out the likely events:
- Every bank in Greece will instantly go insolvent.
- The Greek government will nationalize every bank in Greece.
- The Greek government will forbid withdrawals from Greek banks.
- To prevent Greek depositors from rioting on the streets, Argentina 2002-style (when the Argentinean president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.
- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting).
- The New Drachma will devalue by some 30 percent to 70 percent (probably around 50 percent, though perhaps more), effectively defaulting on 50 percent or more of all Greek euro-denominated debts.
- The Irish will, within a few days, walk away from the debts of its banking system.
- The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
- A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
- The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
- The French and German governments will meet to decide whether (a) to recapitalize the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could, in principle, print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
- They will recapitalize and recapitalize their own banks, but declare an end to all bailouts.
- There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
- This assumption will prove justified, as the Spaniards choose to override the structure of current bond contracts in the Spanish banking sector, recapitalizing a number of banks via debt-equity swaps.
- Bondholders will take the Spanish banking sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years.
By the time they are finally heard, no one will care.
- Attention will turn to the British banks. Then we shall see…
Note that this is about what happens "when" Greece defaults, not "if."
The sovereign debt of Greece is simply unsustainable and therefore won't be sustained. There's no way the country can pay off its debts.
It will default one day.
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